Taxes and Your E-Commerce Business
Government forms and tax options for your online business
Starting an online business can seem overwhelming at first. Finding
the right domain name, getting reliable hosting, web design, and
figuring out credit card transactions are full-time concerns. One
often-overlooked component is taxes. If your website is selling
something tangible, you are required by law to report it. Leafing
through the myriad of tax rules and regulations is frightening, and
some just ignore it altogether (at the risk of being audited). However,
if you want to save yourself from future headaches and lawsuits,
it's best to get everything straightened out as soon as possible.
Do I need a tax ID number?
An Employee Identification Number (sometimes called Federal Tax ID
number) is a nine-digit number assigned by the IRS that identifies
your business to the government. You will need to get one if one
or more of these apply:
1. You pay wages to any employees.
2. Your business is a corporation or partnership.
3. You file pension or excise tax returns.
If you are the only employee for your business, then you can run
your business as a Sole Proprietorship entity, and use your Social
Security Number as your EIN. However, you should look at all of
the business structures before you decide which one is right for
your business.
What are my business entity options?
A Sole Proprietorship is the most common for an upstart online business.
It is owned and maintained by one individual, and has no existence
apart from that individual. All the income and expenses are on your
personal tax return (form 1040). It is the simplest form of business.
However, you are personally liable for your company's liabilities.
If someone sues your business or your business gets too far into
debt, your personal assets can be seized.
A Partnership involves two or more people who share the profits,
or losses, of the business. It's just like a Sole Proprietorship,
except you need an EIN. Also, profits, losses, and liabilities
are split between the partners.
A Corporation is a separate legal entity from the individuals who
started it. It can be taxed and is legally liable for what it does.
The benefit of a corporation is that its corporate status does
not hold the employees liable. The downside is that it is expensive
to start, and requires a lot of bookkeeping.
A combination of a Corporation and a Partnership is the Limited Liability
Company (LLC). The advantage is that the profits and losses are
passed to the owners without taxing the business itself, and the
owners are not personally liable. However, there is no stock, fewer
incentives, and loads of paperwork.
As you can see, there are pros and cons to each business structure.
It is highly recommended that you talk to a local accountant or
lawyer as to which structure best fits your needs.
What other forms and taxes do I need to worry about?
Business License
There are many types of licenses, and even for an online business
you will probably need one to operate legally. If the business is
located within the city limits, then your license comes from the
city. If you are outside the city limits, the license comes from
the county.
Fictitious Business Name
If your business uses a name other than your own, then it is required
by the Trade Name Registration Act for you to register the fictitious
name (which is also known as D/B/A, doing business as). It verifies
that you and your business are one and the same. Depending on where
you live, the form is usually filed at the county clerk's office.
Trademarks
Domain names are a large part of your internet business, and protecting
it is essential. A trademark identifies the source of goods or services
to the consumers. You cannot register a domain name by itself, because
just the name is merely an address. However, your online business
name can be trademarked if it provides a service to consumers, such
as booking flights, research on parenting, comparing insurance companies,
etc. If you create items that you sell on your website, those product
names can be trademarked.
To learn more about trademark rules, go to www.uspto.gov.
Sales Tax
Each state issues a sales and use tax which applies to the use or
consumption of tangible personal property and certain services.
If you sell something tangible, tax must be collected. However,
if you sell an e-book, it might not have to be. A sales tax number
is required for each business before opening, and the rules are different
in every state, so this is something you need to look into. I live
in Missouri, and according to Missouri state law, I am subject to
sales tax if the product's shipping and delivery points are both
in Missouri. However, your state might be different.
Self-Employment Tax
Self-employment tax (SE tax) is for individuals who work for themselves,
and is a social security and Medicare tax. You must pay the SE
tax and file Schedule SE on Form 1040 if your net earnings from self-
employment equaled or exceeded $400. To figure your net earnings,
multiply your total earnings subject to the SE tax by 92.35%. You
will be taxed 15.3% on the net earnings.
What can I deduct?
As far as deducting part of your home as a business expense, that
only works if that part of your home is exclusively for business.
If your computer and desk are in the living room, that square footage
cannot be deducted. To deduct a part of your home, it must
meet one of the following criteria:
1. Your principal place of business
2. You meet or deal with customers or clients in this area as a normal
part of your business.
3. An unattached, separate structure used in connection with your
business.
There are also a few other small requirements. The only exceptions
are for day-care providers and the storage of inventory or product
samples used in your business. If you buy a computer and over 50%
of its use is for the business, you can deduct the depreciation on
the portion of your computer used for business as a miscellaneous
itemized deduction. Expenses such as web hosting, domain registration,
etc, can all be deducted as business expenses.
Some rules vary from state to state and even county to county, so
be sure to stop by your local county clerk's office or talk to other
home businesses in the area to ensure everything is compliant. For
more information on rules and taxes, go to www.irs.gov and www.ftc.
gov.
Brian Roe publishes Profitable Net Marketing, an informative newsletter
full of helpful hints, opportunities, and time saving tools to help
start and support YOUR home business. For a FREE subscription check
out http://www.profitablenetmarketing.com
